U.S. Dollar Momentum and Inflation Expectations: Navigating the Pre-CPI Landscape in August 2025

The U.S. dollar’s positioning in August 2025 reflects a complex interplay of inflation expectations, Federal Reserve policy signals, and macroeconomic recalibration. With the August Consumer Price Index (CPI) report due on September 11, markets are keenly attuned to the delicate balance between easing monetary policy and persistent price pressures. This analysis unpacks the dynamics shaping dollar momentum and inflation expectations ahead of the critical data release.

Inflationary Pressures: A Mixed Picture

The July 2025 CPI report revealed a year-over-year inflation rate of 2.7%, with core CPI rising 3.1% YoY, in line with forecasts [1]. While headline inflation was tempered by falling gasoline and grocery prices, core inflation remains anchored by sticky sectors like shelter and medical care [2]. This duality underscores the Federal Reserve’s challenge: addressing transitory cost declines while managing entrenched demand-side pressures.

Notably, tariffs—often a wildcard in inflation debates—have yet to trigger broad price surges, according to analysts [3]. However, the core CPI’s resilience suggests that structural factors, such as labor market tightness and housing costs, continue to outpace temporary disinflationary forces. This divergence between headline and core metrics has fueled speculation about the Fed’s next move, with traders now pricing in a 95% probability of a 25-basis-point rate cut in September [4].

Dollar Positioning: A Tale of Two Yields

The U.S. dollar’s performance in August 2025 has been shaped by divergent bond market signals. Short-term Treasury yields, such as the 2-year note, fell to 3.73% as investors priced in aggressive Fed easing [1]. Conversely, long-term yields, including the 10-year and 30-year bonds, climbed to 4.285% and 4.89%, respectively, reflecting lingering concerns about inflation persistence and fiscal risks [1]. This steepening yield curve—one of the steepest in years—highlights the tension between equity markets betting on rate cuts and bond markets hedging against inflation reacceleration.

The dollar’s weakness in August followed Federal Reserve Chair Jerome Powell’s Jackson Hole speech, which hinted at a 25-basis-point cut in September amid shifting economic risks, including rising unemployment [2]. Earlier in the month, however, the dollar had strengthened as traders recalibrated expectations for monetary easing. This volatility underscores the dollar’s sensitivity to Fed communication and data-dependent policy outcomes.

Macroeconomic Strategies: Hedging and Sector Rotation

Investors are adopting defensive strategies to navigate the inflation-dollar nexus. Treasury Inflation-Protected Securities (TIPS) have gained traction as a hedge against inflation surprises, while sector rotation into energy and healthcare—categories with inflationary tailwinds—has accelerated [2]. Meanwhile, the broader macroeconomic landscape remains fragile: nonfarm payrolls have shown weaker gains, and unemployment trends suggest a cooling labor market [1].

The Federal Reserve’s data-dependent approach has left markets in a state of anticipation. A hotter-than-expected CPI report could delay rate cuts and bolster the dollar, while a softer reading might reinforce the case for aggressive easing. This uncertainty has amplified the importance of the September 11 CPI release, which will serve as a pivotal inflection point for both policy and positioning.

Conclusion: A Delicate Balancing Act

The U.S. dollar’s momentum in August 2025 hinges on the Fed’s ability to reconcile inflation control with growth support. While core CPI remains a drag, the market’s pivot toward rate cuts reflects confidence in the central bank’s capacity to manage risks. However, the steep yield curve and sector-specific inflationary pressures suggest that the path forward is far from linear. Investors must remain agile, balancing short-term policy expectations with long-term inflation risks.

Source:
[1] Consumer Price Index Summary - 2025 M07 Results, [https://www.bls.gov/news.release/cpi.nr0.htm]
[2] CPI inflation report July 2025, [https://www.cnbc.com/2025/08/12/cpi-inflation-report-july-2025.html]
[3] US CPI: A notable absence of tariffs, [https://www.efginternational.com/us/insights/2025/a-notable-absence-of-tariffs.html]
[4] Markets Brace for Inflation as Slowdown Takes Hold, [https://www.tradestation.com/insights/2025/09/08/markets-inflation-slowdown/]